Tweet
Former Regulator Talks Fraud and the Big Bank Getaway
Transcript
JEFFREY BROWN: And finally tonight, "NewsHour" economics correspondent Paul Solman continues his series on bank reform and the future of Wall Street.
So far, we have heard from Robert Kelly, CEO of Bank of New York Mellon, and Ronald Reagan's budget chief, David Stockman.
Tonight, the view of a former bank regulator who thinks today's bankers have not been regulated enough.
It's all part of Paul's ongoing reporting on Making Sense of financial news.
MAN: Oh, hi, Vern. Me and Shorty just borrowed your new truck to go down to that new branch of Vernon Savings and Loan in Wichita Falls.
PAUL SOLMAN: Vernon -- or, as it became not-so-affectionately known in 1987, when the "NewsHour" did this story on the S&L crisis, "Vermin" Savings and Loan -- a deregulated bank that invested depositor cash boldly, rewarded executives lavishly, and went bust in a Texas minute.
REPORTER: Don Dixon has filed for bankruptcy, and investigators have accused him of looting Vernon of some $8 million in salaries, dividends and bonuses.
PAUL SOLMAN: The government's William Black gave our Tom Bearden a peek into Dixon's perks, including his yacht, the High Spirits.
WILLIAM BLACK, University of Missouri, Kansas City: It's the sister ship to the presidential yacht, the Sequoia, and it was often berthed in Washington, D.C., where it was used as a lobbying platform by Dixon and had a number of very well-known congressmen and senators as its leading guests.
PAUL SOLMAN: Dixon eventually served 40 months in prison.
Bill Black, meanwhile, worked as a bank regulator through the mid-'90s, became an academic expert on white-collar crime, and wrote a book, "The Best Way to Rob a Bank Is to Own One," that Nobel laureate George Akerlof calls a classic.
Black says there are many parallels between today's financial institutions and the Vernons of yesteryear, and one big difference.
WILLIAM BLACK: In the savings and loan crisis, where the national commission finds that the typical large failure fraud was invariably present, we had over 1,000 convictions of senior insiders, what the FBI referred to as priority cases. At this stage among the subprime lending specialists, we have zero convictions. We have zero indictments.
PAUL SOLMAN: So, what would you do?
WILLIAM BLACK: I would prosecute the felons.
So, in September 2004, the FBI began publicly warning that there was -- quote, unquote -- "epidemic" of mortgage fraud, and it predicted that it would produce an economic crisis, if it were not dealt with. The FBI has also said that 80 percent of the mortgage fraud losses occur when lender personnel are involved. So, Fitch looks at a small sample of these loans, finally, in November 2007.
PAUL SOLMAN: Fitch is one of the ratings agencies?
WILLIAM BLACK: Yes. It's the smallest of the big three.
What did they find? They said, the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined. And they said that normal underwriting would have detected all of those frauds.
So, this is coming from the lenders overwhelmingly. They created incentive systems for the loan brokers and the loan officers that were based overwhelmingly on volume, and nothing on quality. We know that they gutted their underwriting standards. We know that you got in trouble if you were moral and tried to be a good officer and protect the organization from loss.
PAUL SOLMAN: But, if I were a loan officer in those days, I think I would have said to myself, I'm getting money into the hands of people who previously wouldn't have been able to buy a home. And we all think homeownership is a good thing in America.
WILLIAM BLACK: Well, we have lots of things that we study in criminology of what we call neutralization techniques, where people try to interpret their criminal acts as socially beneficial. So, yes, psychologically, maybe that happened sometimes.
But until the FBI brings these cases, we're not going to have we're not going to have definitive information.
PAUL SOLMAN: What would you have us do about the major financial institutions as they currently exist?
WILLIAM BLACK: First, stop them from getting bigger. The 19 largest institutions are what we call systemically dangerous institutions. Many of them are already insolvent on any real market value basis.
PAUL SOLMAN: What do you mean insolvent? I mean, they're reporting large enough profits, that they can give bonuses to their employees.
WILLIAM BLACK: They were able to get Congress to extort FASB, which is the Accounting Standards Board, to change the rules, so that you no longer have to recognize losses on your bad loans, unless and until you actually sell them.
PAUL SOLMAN: Extort FASB? Why would it be extorting FASB?
WILLIAM BLACK: They said, you will change the rules, and you will change the rules such that banks no longer have to recognize their losses, or we will remove your authority over the accounting rules, which is the whole reason for existence for FASB, right? So, that's extortion in anybody's language.
PAUL SOLMAN: But they did that in order to give financial institutions some breathing room. After all, these assets were selling at fire-sale prices. Eventually, they would come back up. So, let things calm down and then price them.
WILLIAM BLACK: No. I mean, now, that -- you're again stating the rhetoric that was used, but that's not the reality. This was done in 2009. The secondary market in subprime collapsed in March of 2007.
So, this wasn't some weird idiosyncratic price. And it's not correct that these assets didn't sell. They just sold at their true economic value, which is about 25 cents on the dollar, in terms of the collateralized debt obligations.
Now, if you have 75 percent losses, how many institutions that have large amounts of CDOs could possibly be solvent? And the answer is not many. And, so, they had the political juice to get the accounting rules changed.
Now, this is -- of course, it was accounting fraud that allowed you to value these CDOs as if they were money good assets, AAA assets and such, when they were, in fact, loans overwhelmingly backed by fraudulent mortgages.
PAUL SOLMAN: But, in the early 1980s, the same thing was said about financial institutions who had loaned money to the Third World, Third World countries, and we said, let's be forbearing. Let's not mark-to-market and put them out of business. And that all worked out.
WILLIAM BLACK: Well, the 1980s, of course, were the savings and loan debacle, and that was the logic that people tried to apply there. Oh, you know, these are just misunderstood assets. They're not bad assets. It must just be cyclical. Let's just wait.
And that was the official policy of the government. And it produced what at that time was the worst financial scandal in U.S. history. It massively increased losses. Now, why did it do so? First, because, overwhelmingly, those were fraudulent loans that were causing the worst troubles. That's different than the loans to Brazil that you're referring to.
PAUL SOLMAN: You see no arguments that keeping the system as it is, is a legitimate political objective?
WILLIAM BLACK: Well, then you are going to have recurrent crises that get bigger and are disastrous. The financial firms get this burst of short-term profits. They max out their personal bonuses of their executives. It's great for them, but it's terrible for the world.
PAUL SOLMAN: Bill Black, thank you.
JEFFREY BROWN: In his next conversation, Paul gets a different take from a past banking regulator. That will come from William Isaac, former head of the Federal Deposit Insurance Corporation.
JEFFREY BROWN: And finally tonight, "NewsHour" economics correspondent Paul Solman continues his series on bank reform and the future of Wall Street.
So far, we have heard from Robert Kelly, CEO of Bank of New York Mellon, and Ronald Reagan's budget chief, David Stockman.
Tonight, the view of a former bank regulator who thinks today's bankers have not been regulated enough.
It's all part of Paul's ongoing reporting on Making Sense of financial news.
MAN: Oh, hi, Vern. Me and Shorty just borrowed your new truck to go down to that new branch of Vernon Savings and Loan in Wichita Falls.
PAUL SOLMAN: Vernon -- or, as it became not-so-affectionately known in 1987, when the "NewsHour" did this story on the S&L crisis, "Vermin" Savings and Loan -- a deregulated bank that invested depositor cash boldly, rewarded executives lavishly, and went bust in a Texas minute.
REPORTER: Don Dixon has filed for bankruptcy, and investigators have accused him of looting Vernon of some $8 million in salaries, dividends and bonuses.
PAUL SOLMAN: The government's William Black gave our Tom Bearden a peek into Dixon's perks, including his yacht, the High Spirits.
WILLIAM BLACK, University of Missouri, Kansas City: It's the sister ship to the presidential yacht, the Sequoia, and it was often berthed in Washington, D.C., where it was used as a lobbying platform by Dixon and had a number of very well-known congressmen and senators as its leading guests.
PAUL SOLMAN: Dixon eventually served 40 months in prison.
Bill Black, meanwhile, worked as a bank regulator through the mid-'90s, became an academic expert on white-collar crime, and wrote a book, "The Best Way to Rob a Bank Is to Own One," that Nobel laureate George Akerlof calls a classic.
Black says there are many parallels between today's financial institutions and the Vernons of yesteryear, and one big difference.
WILLIAM BLACK: In the savings and loan crisis, where the national commission finds that the typical large failure fraud was invariably present, we had over 1,000 convictions of senior insiders, what the FBI referred to as priority cases. At this stage among the subprime lending specialists, we have zero convictions. We have zero indictments.
PAUL SOLMAN: So, what would you do?
WILLIAM BLACK: I would prosecute the felons.
So, in September 2004, the FBI began publicly warning that there was -- quote, unquote -- "epidemic" of mortgage fraud, and it predicted that it would produce an economic crisis, if it were not dealt with. The FBI has also said that 80 percent of the mortgage fraud losses occur when lender personnel are involved. So, Fitch looks at a small sample of these loans, finally, in November 2007.
PAUL SOLMAN: Fitch is one of the ratings agencies?
WILLIAM BLACK: Yes. It's the smallest of the big three.
What did they find? They said, the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined. And they said that normal underwriting would have detected all of those frauds.
So, this is coming from the lenders overwhelmingly. They created incentive systems for the loan brokers and the loan officers that were based overwhelmingly on volume, and nothing on quality. We know that they gutted their underwriting standards. We know that you got in trouble if you were moral and tried to be a good officer and protect the organization from loss.
PAUL SOLMAN: But, if I were a loan officer in those days, I think I would have said to myself, I'm getting money into the hands of people who previously wouldn't have been able to buy a home. And we all think homeownership is a good thing in America.
WILLIAM BLACK: Well, we have lots of things that we study in criminology of what we call neutralization techniques, where people try to interpret their criminal acts as socially beneficial. So, yes, psychologically, maybe that happened sometimes.
But until the FBI brings these cases, we're not going to have we're not going to have definitive information.
PAUL SOLMAN: What would you have us do about the major financial institutions as they currently exist?
WILLIAM BLACK: First, stop them from getting bigger. The 19 largest institutions are what we call systemically dangerous institutions. Many of them are already insolvent on any real market value basis.
PAUL SOLMAN: What do you mean insolvent? I mean, they're reporting large enough profits, that they can give bonuses to their employees.
WILLIAM BLACK: They were able to get Congress to extort FASB, which is the Accounting Standards Board, to change the rules, so that you no longer have to recognize losses on your bad loans, unless and until you actually sell them.
PAUL SOLMAN: Extort FASB? Why would it be extorting FASB?
WILLIAM BLACK: They said, you will change the rules, and you will change the rules such that banks no longer have to recognize their losses, or we will remove your authority over the accounting rules, which is the whole reason for existence for FASB, right? So, that's extortion in anybody's language.
PAUL SOLMAN: But they did that in order to give financial institutions some breathing room. After all, these assets were selling at fire-sale prices. Eventually, they would come back up. So, let things calm down and then price them.
WILLIAM BLACK: No. I mean, now, that -- you're again stating the rhetoric that was used, but that's not the reality. This was done in 2009. The secondary market in subprime collapsed in March of 2007.
So, this wasn't some weird idiosyncratic price. And it's not correct that these assets didn't sell. They just sold at their true economic value, which is about 25 cents on the dollar, in terms of the collateralized debt obligations.
Now, if you have 75 percent losses, how many institutions that have large amounts of CDOs could possibly be solvent? And the answer is not many. And, so, they had the political juice to get the accounting rules changed.
Now, this is -- of course, it was accounting fraud that allowed you to value these CDOs as if they were money good assets, AAA assets and such, when they were, in fact, loans overwhelmingly backed by fraudulent mortgages.
PAUL SOLMAN: But, in the early 1980s, the same thing was said about financial institutions who had loaned money to the Third World, Third World countries, and we said, let's be forbearing. Let's not mark-to-market and put them out of business. And that all worked out.
WILLIAM BLACK: Well, the 1980s, of course, were the savings and loan debacle, and that was the logic that people tried to apply there. Oh, you know, these are just misunderstood assets. They're not bad assets. It must just be cyclical. Let's just wait.
And that was the official policy of the government. And it produced what at that time was the worst financial scandal in U.S. history. It massively increased losses. Now, why did it do so? First, because, overwhelmingly, those were fraudulent loans that were causing the worst troubles. That's different than the loans to Brazil that you're referring to.
PAUL SOLMAN: You see no arguments that keeping the system as it is, is a legitimate political objective?
WILLIAM BLACK: Well, then you are going to have recurrent crises that get bigger and are disastrous. The financial firms get this burst of short-term profits. They max out their personal bonuses of their executives. It's great for them, but it's terrible for the world.
PAUL SOLMAN: Bill Black, thank you.
JEFFREY BROWN: In his next conversation, Paul gets a different take from a past banking regulator. That will come from William Isaac, former head of the Federal Deposit Insurance Corporation.